If you were in the full-time workforce in 1980, you likely remember when the 401(k) plan came on the scene. Up until that time, pensions were the retirement vehicle of choice, but as pensions became more costly, the 401(k) became the plan of choice and by 1990, it was commonplace in private sector employee benefit plans. As of the early 1990s, 401(k)s had an estimated $900 billion in assets.
SEE: The 4-1-1 On 401(k)s
By 2011, that number had ballooned to $4.3 trillion, but something else had ballooned as well: the fees. As of 2010, plan administrators were charging more than $85 billion in management fees and as more baby boomers find themselves closer to retirement, they're noticing that they aren't as prepared for retirement as they thought they would be, and a portion of the problem may be found in the fees.
How important are the fees? According to the Vanguard Group, for every .5% in fees, a person will have 10% less in their 401(k) after 30 years of work. For this reason, workers need to closely monitor the fees they're paying for their 401(k).
We've all heard how difficult it is to make side-by-side comparisons of mattresses, because different model numbers are manufactured for individual stores. To some degree, that's also the case with 401(k)s. Plans are often put together by the employer and the plan administrator, but until now, not all fees that are passed on to the individual employee have been disclosed.
Under new laws set to go in to effect by the beginning of April (Although it could be pushed back), all fees being passed on to the employee must be disclosed in an easy-to-read format, so employees can compare the efficiency of their choices. The company administering the plan will also have to disclose how they are collecting the fees. That may include billing the plan, deducting the fees from the employee's gains or taking a percentage off the plan's total return.
Experts believe that by disclosing the fee structure, more companies will include more passively managed funds that tend to be much lower in fees than actively managed funds, which employ investors who try to beat the overall market yet show only marginal success over the long term.
According to the Huffington Post, adding a wider range of passively managed index funds could come with a large benefit. One study found that a retirement account could be up to $450,000 larger if a predominance of index funds with low fee structures were used. Under new disclosure laws, those without sophisticated financial knowledge would finally be able to compare the various offerings using the easy to understand information disclosed.
The Bottom Line
Not sure what you're being charged with your current 401(k) holdings? Current laws require that certain fees be disclosed already. Request a prospectus for each of your funds or look for the information online. Consider keeping at least around 20% of your allocation in a passively managed index fund that is probably already offered.
Your employer will soon be required to disclose to you all fees associated with your plan. Once that information is provided to you, take some time to read through it and make changes to your plan based on that knowledge. Better yet, pay a fee-only investment advisor a one-time fee to examine your 401(k) and recommend changes.